Ghosts, goblins, and coronavirus might not be the only scary things this Halloween. After the warning from Fastly (FSLY) after the bell on Wednesdays, investors in high growth names have been put on alert. Fastly's warning wasn't a major guide down. The company lowered revenue estimates from a range of $73.5 million - $75.5 million to a range of $70 to $71 million. The company's midpoint moves to $70.5 million versus a previous midpoint of $74.5 million and consensus estimates of $74.8 million. Disappointing? Sure, but we're talking about 5% below expectations. That was enough to knock 24% off the stock price. Shares were off by nearly 30% at one point.
I'm not defending the previous valuation or saying the hit isn't warranted, but this is a good example on how post-earnings reactions/performance may be "leveraged". With the recent big moves, especially in so many cloud names, beating guidance for the current quarter and guiding next quarter in-line probably won't do it. A meet or beat with a subsequent lowering of the bar going forward will likely be met with outsized moves lower. I don't know that the 5% guide down on estimates will equate to a 25% to 30% move lower for all cloud names, but at least we have a starting point to measure expectations.
One reaction does not make a trend, so we need to watch the next several reports in the sector. If we have similar reactions, then our job will be to look for the outlier post-earnings. Watch for the name that doesn't guide higher, but whose shares don't trade lower.
I admit trying to predict earnings is a bit like finding a grenade on the floor with its pin pulled. There's little safety in either, but at least with earnings, we can observe patterns. What I've found is the early patterns often differ from the late patterns. We're using early patterns to play names in the middle of the release period. Then, we're looking at potential opposite approaches late in the season.
We're down for a third consecutive day, so while I was hesitant yesterday in terms of buying because of risk versus reward, if you have been short, today doesn't appear to be the day to add to that. Chasing a move into the third consecutive day is a general no-no. That means if you've been waiting to buy a pullback, then you might start to nibble today. If you've been short, then you'll want to tighten stops or even cover a portion of your recent positions.
At this stage, I don't believe we'll see any stimulus package prior to the election. However, I expect we'll see continued chatter over the next week about "hopes" for a bill. We may even get a Hail Mary bill that has no chance of passing, but that is proposed with the hopes of instilling people with confidence. The market has shown time and time again, it's not the economy, so while a stimulus package would power another move higher, it may not be necessary for the bulls to continue their march higher over the next six months.
While I've been playing it tight to the vest the last week, I am starting to look for some nibbling opportunities today. My focus is on those Nasdaq 100 early morning highs. I want to see them taken out before I look for a trade. We're a bit below that now, so my approach is to wait for a retest of morning lows or a take out of the morning highs. Of course, your mileage may vary.